DocuSign’s Stock Collapse Sets the Low Line for Earnings

(Bloomberg) — DocuSign Inc.’s earnings expectations they are so low after a series of outbursts in the one-time pandemic winner that some investors wonder if it could get worse.

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Shares of the company, which provides electronic signature services used in real estate and other businesses, have fallen 65% this year, the second-worst performer on the Nasdaq 100. As with other companies that have grown in the age of Covid-19 — including of Netflix Inc., Zoom Video Communications Inc. and Peloton Interactive Inc. — investors have lowered their estimates of its growth prospects in a reopened economy.

The stock fell 2.6% on Thursday.

DocuSign’s second-quarter results are expected after the market close and follow a trio of disastrous reports, each of which sent the stock down between 20% and 42% in the next session. Options traders expect another big swing after earnings, with an implied one-day move of 18%. However, shares are now trading at some of their cheapest valuations on record, and the disappointments could allow DocuSign to more easily overcome low expectations.

“Investor sentiment for DocuSign is among the most negative I’ve seen, and that means a low bar for earnings,” said Hilary Frisch, senior research analyst at ClearBridge Investments. “It’s hard to call the near-term fundamental outlook positive, but we’re bullish on the long-term story and the valuation is compelling on that basis. We believe we can benefit, while others may be too afraid to jump in.”

After tripling in 2020, the stock fell 31% last year and the selloff intensified in 2022, with shares hitting a three-year low on Tuesday. Analysts forecast sales growth of 17% this year, up from 40% to 50% in the past three financial years. DocuSign’s struggles contributed to the departure of CEO Dan Springer in June.

The drop has DocuSign trading at about 31.9 times forward earnings. That’s above the Nasdaq 100’s multiple of 21, but near the all-time low for DocuSign, which went public in 2018, and below consumer staples companies like Costco Wholesale Corp or Clorox Co.

Analysts backed up their estimates. The average forecast for full-year adjusted earnings per share is down 20% from six months ago, according to data compiled by Bloomberg, while the revenue view has fallen 7.4% over the same period.

But in a glimmer of hope that the worst can be priced in, most of these revisions were made months ago. Market forecasts for earnings have held steady over the past month, while the sell-off consensus has not budged since late March. And even after the estimate cuts, analysts see double-digit revenue growth for the company in the coming years.

“Coming out of this recession, my bet is that DocuSign will grow faster than these fundamentals or the S&P 500,” Frisch said. “I don’t have many names in my universe with this kind of growth, trading at a valuation that rivals traditional defense industries.”

The big cloud hanging over DocuSign, and all growth stocks, is the financial environment. Federal Reserve Chairman Jerome Powell recently indicated that the U.S. central bank is likely to continue raising interest rates, prompting a broad decline in tech. In another valuation headwind, the yield on the 10-year U.S. Treasury note is around 3.25%, more than double where it was at the start of the year.

For Scott Yuschak, managing director of equity strategy at Truist Advisory Services, this kind of scenario is a key reason to continue to avoid stocks.

“The valuation is no longer ridiculous, but I wouldn’t say it’s cheap, especially because it doesn’t have as much cash flow as we’d like and we don’t know what demand looks like going forward,” he said. . “Given the uncertain growth outlook, it’s hard to get into a name like this.”

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(Open market updates.)

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